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On March 10, 2014 the Enforcement Division (the “Division”) of the SEC (the “Commission”) introduced its Municipalities Continuing Disclosure Cooperation Initiative (“MCDC Initiative” or the “Initiative”). The Initiative aims to correct material misrepresentations about past compliance with the continuing disclosure requirement under SEC Rule 15c2-12. If municipal bond issuers, obligated persons, and underwriters, self-report possible violations by September 9, 2014, the Enforcement Division will recommend favorable settlement terms. After September 9, 2014, the Division has indicated that those who were eligible, but failed to self-report, will face harsher penalties and sanctions.

I. Rule 15c2-12 Requirements

Rule 15c2-12 covers continuing disclosure in the municipal securities market through two key requirements. First, an underwriter generally cannot purchase or sell municipal securities unless the issuer or obligor has agreed to provide continuing disclosure about the security and issuer or obligor, including its financial condition and operating data. Second, municipal bond offering documents (i.e., official statements) must contain a description of any instances in the previous five years in which the issuer or obligor materially failed to comply with any previous commitment to provide such continuing disclosure.

II. The MCDC Initiative

A. Who Can Self-Report

Only municipal bond issuers, obligors, and underwriters have the opportunity to self-report under the Initiative. Individuals such as municipal officers or officers, directors or employees of underwriters, are not covered under the Initiative.

An issuer or obligor who potentially made a material misrepresentation about its prior compliance with Rule 15c2-12 continuing disclosure requirements should consider self-reporting to the Division. Underwriters of offerings in which the offering documents contain materially inaccurate statements regarding an issuer’s or obligor’s prior compliance with the continuing disclosure obligations, should also consider self-reporting to the Division.

B. How to Self-Report

To self-report under the Initiative, an eligible issuer, obligor, or underwriter must complete the MCDC Initiative Questionnaire, and submit it to the Commission before 12:00 a.m. EST on September 10, 2014. Completed questionnaires can be submitted by email to MCDCsubmissions@sec.gov, by fax to (301) 847-4713 or by mail to MCDC Initiative, U.S. Securities and Exchange Commission, Boston Regional Office, 33 Arch Street, Boston, MA 02110.

C. Standardized Settlement Terms

Eligible issuers, obligors, and underwriters who do not self-report, could be subject to more severe penalties, including increased financial sanctions. However, the Division will recommend standardized favorable settlement terms for issuers, obligors, and/or underwriters who self-report materially inaccurate statements by September 9, 2014. Under these terms, issuers, obligors, and underwriters will be required to implement undertakings to correct and improve their continuing disclosure compliance.

For issuers and obligors, the Division will recommend the following terms:

Type of Proceeding and Nature of Charges. Cease and desist proceeding while neither admitting nor denying any wrongdoing.

Undertakings.

Establish policies, procedures, and training regarding the continuing disclosure obligations within 180 days of the proceedings;

Comply with existing continuing disclosure obligations and update past delinquent filings within 180 days of the proceedings;

Cooperate with any subsequent investigation by the Division regarding the material misrepresentations;

Disclose in a clear and conspicuous manner the settlement terms in any offering documents within five years of the proceedings; and

Provide the Commission with a compliance certificate of these undertakings on the one year anniversary of the date of the proceedings.

Civil Penalties. No civil penalties.

For underwriters, the Division will recommend the following terms:

Type of Proceeding and Nature of Charges. Cease and desist proceeding while neither admitting nor denying any wrongdoing.

Undertakings.

Hire an independent consultant to conduct a compliance review and, within 180 days of the proceedings, provide recommendations to the underwriter about the underwriter’s due diligence process and procedures;

Within 90 days of the consultant’s recommendations, take reasonable steps to enact these recommendations, unless the underwriter can demonstrate to the Commission that the recommendations are unduly burdensome;

Cooperate with any subsequent investigation by the Division regarding the material misrepresentations; and

Provide the Commission with a compliance certificate of these undertakings on the one year anniversary of the date of the proceedings.

Civil Penalties. No underwriter will be required to pay more than $500,000 in civil penalties.

For offerings of $30 million or less, underwriters will be required to pay a civil penalty of $20,000 per offering containing a materially false statement.

For offerings of more than $30 million, the underwriter will be required to pay a civil penalty of $60,000 per offering containing a materially false statement.

D. Next Steps: Determining Whether to Self-Report

If you have participated in a municipal bond offering in the past five years, you should review the offering documents for those bonds to determine if disclosures of prior compliance with continuing disclosure obligations were accurate. Because the Commission has not provided any guidance on what they consider “material,” one of the biggest difficulties when deciding whether to report is determining whether a statement regarding prior compliance was “materially” inaccurate.

Please feel free to contact us if you have any further questions or for assistance in determining whether you should self-report under the MCDC Initiative.